Albany International Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Albany International Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.

Thank you, Tani, and good morning, everyone. Welcome to Albany International's second quarter 2021 conference call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice containing regarding our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking, that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve, and our financial results. For a full discussion, including a reconciliation of non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both our earnings release of July 26th, 2021, as well as our SEC filings, including our 10-K. Now, I'll turn the call over to Bill Higgins, President and Chief Executive Officer who will provide opening remarks. Bill?

Thanks, John. Good morning. Welcome, everyone. Thank you for joining our second quarter earnings call. I'm pleased to report that we delivered another strong quarter with excellent performance in both segments. Our operations continued to do a great job for our customers with best-in-class delivery, quality, and service. I'm really proud of our employees and how they stayed focused on safety, productivity, cost savings, and lean Kaizen process improvements. As a company, we delivered $235 million in revenue in the second quarter, growing revenues both year over year and sequentially, and we achieved near record levels of profitability. Gross margins of 43% and operating margins of 21% are our second highest quarterly margin performance. We achieved GAAP EPS of $0.97 or adjusted EPS of $1.01 and our best free cash flow quarter in a company's history, generating over $50 million in free cash flow in the second quarter. We did face supply chain challenges and materials cost inflation and logistics that our teams were able to manage through and successfully offset some of their impact on the bottom line. And we'll keep an eye on these going forward. We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth. As we've mentioned before, we're increasing our investment in research and technology across the company. In general, we're encouraged by the economic recovery in key markets. coming out of the pandemic slowdown. We're cautiously watching how the Delta variant might affect this recovery, particularly international air travel and the less vaccinated regions of the world. That said, long-term secular trends are favorable, and Albany's market positions, global footprint, and product development take advantage of these trends. In our engineered composite segment, as domestic airline travel recovers, we expect to benefit from our position on narrow-body aircraft with LEAP engines and our partnership with Saffron, As we mentioned last quarter, we're working closely with Saffron to coordinate ramping production as LEAP demand picks up on recovering narrowbody OEM production. Our plans include hiring additional workers and preparing for increased production in our three LEAP Solis as we exit 2021 GROW in the future. We're very excited about Saffron's recent announcement with GE to partner in development of the next generation RISE engine. We view Saffron as an important long-term customer and partner. As we've previously mentioned, we're investing more this year in R&D projects, particularly with new customers and new products, using advanced materials such as our 3D woven composites with a goal to diversify and grow our customer base, broaden our material science capabilities. This ranges from our proprietary 3D woven composites currently used on LEAP engine fan blades and fan cases to automated fiber placement composite wing skins for Lockheed Martin's F-35 Joint Strike Fighter to complex components on the Sikorsky CH-53K helicopter. We continue to develop applications for the Wing of Tomorrow program with Airbus Industries. And along these lines, we're pleased to announce earlier this month our technology collaboration with Spirit Aerosystems to develop advanced 3D woven composite applications for hypersonic vehicles. This collaboration capitalizes on the unique capabilities of both companies to achieve superior hypersonic design solutions and efficient manufacturability using Albany's proprietary 3D woven composite technologies, and it builds on our demonstrated ability to manufacture 3D woven composites at commercial scale. It's an exciting example of the types of new business and advanced technology programs we're investing in today to help secure our future long-term growth. In the machine clothing segment, we're optimistic about recovering global growth, expect to benefit from long-term secular trends, which should underpin the demand for paper products. Our machine clothing business has benefited as a leading supplier in the industry since we're well positioned globally, particularly in the growing end markets for packaging and tissue products. Our product development strategies, operational improvements, and technical service continue to target these higher growth end markets. Our operating teams have been firing on all cylinders, and we expect to continue our strong execution in the second half of the year. Let me say a few words about machine clothing's end markets. Packaging, tissue, corrugated products, pulp, and building products end markets have remained the strongest subsegments, with packaging benefiting from increasing online shopping as retail goes through a fundamental shift worldwide. In tissue, we may be in a transition phase whereby at-home demand settles down and people return to school, restaurants, offices, vacations, et cetera. We've yet to see a pickup, however, in the away-from-home paper markets for our belts, which should eventually improve. Not surprisingly, publication grades continued their decline and only represented 16% of MC revenues in the second quarter. Markets in North America and China are robust, while emerging economies are still grappling with COVID and low vaccination rates, likely requiring more time to rebound. In summary, our machine clothing segment continues to perform well. Our operations are strong, taking advantage of the higher growth sub-segments, and serving customers well around the world as a recognized global leader in the industry. This success is the result of disciplined execution of our long-term strategy. As I mentioned, we have a strong balance sheet and good free cash flow generation, which allows us to continue investing in the technologies and customer programs that expand and broaden our competitive position in both segments. Our first priority for capital allocation is to invest in organic growth programs across both business segments, and then to seek acquisitions that fill our long-term strategy. Our reputation for reliability, service, and technical excellence is well-established in machine clothing, and our brand is growing in aerospace as a reliable supplier and engineer materials partner. We're optimistic about the long-term opportunities in both segments. So with that, I'll turn it over to Stephen for more detail on the financials. Stephen? Thank you, Bill. Good morning to everyone.

I'll talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. For the second quarter, total company net sales were $234.5 million, an increase of 3.8% compared to $226 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by 1% year over year in the quarter. In machine clothing, also adjusting for currency translation effects, net sales were up 0.8% year over year, driven by increases in packaging grades and engineered fabrics, partially offset by declines in all other grades. Publication revenue declined by over 7% in the quarter, and as Bill mentioned, represented only 16% of MC's revenue this quarter. Tissue grades also declined year over year due to a more normal level of demand for grades to support customer production for at-home use, resulting in a decline from the highs for those grades that we saw last year without significant recovery to date in the away-from-home product grades. Engineered composites net sales, again after adjusting for currency translation effects, grew by 1.3%. primarily driven by growth on LEAP and CH53K, partially offset by a decline on the 787 platform. During the quarter, the ASC LEAP program generated a little over $25 million in revenue, comparable to the first quarter of this year, but up over $10 million from the second quarter of last year. At the same time, we reduced our inventory of LEAP 1B finished goods by over 20 engine shipsets in the quarter, leaving us with about 170 LEAP 1B engine shipsets on the balance sheet at the end of the second quarter. As you will recall, we previously recognized revenue on these engine shipsets, and their value was reported under contract assets on our balance sheet. Also during the most recent quarter, We generated about $3 million in revenue on the 787 program, up from less than $1 million in the first quarter, but down from almost $14 million in the second quarter of last year. Second quarter gross profit for the company was $101.7 million, a reduction of 1% from the comparable period last year. The overall gross margin decreased by 220 basis points. from 45.6 to 43.4% of net sales. Within the MC segment, gross margin declined from 54.5% to 52.9% of net sales, principally due to foreign currency effects, higher input costs, and higher fixed costs, partially offset by improved absorption. For the AEC segment, The gross margin declined from 26.7% to 23% of net sales, driven primarily by a smaller impact from changes in the estimated profitability of long-term contracts. During this quarter, we recognized a net favorable change in the estimated profitability of long-term contracts of just over $4 million. but this compares to a net favorable change of over $7 million in the same quarter last year. The favorable adjustment this quarter was principally due to a reduction as a result of changes in volume expectations to previously established loss reserves on a couple of specific programs and is therefore not necessarily reflective of ongoing enhancements to profitability. In fact, As we previously discussed, the expected revenue declines this year in some of our fixed-price programs are leading to headwinds to long-term program profitability this year. Second quarter selling, technical, general, and research expenses increased from $47.4 million in the prior year quarter to $51.8 million in the current quarter, and also increased as a percentage of net sales from 21% to 22.1%. The increase in the amount of expense reflects higher incentive compensation expense, higher R&D spending, higher travel expenses, and higher foreign currency revaluation losses. Total operating income for the company was 50 million, down from 52.7 million in the prior year quarter. Machine clothing operating income fell by 600,000, caused by higher STG and R expense, partially offset by higher gross profit and lower restructuring expense. And AEC operating income fell by 1.1 million, caused by lower gross profit and higher STG and R expense, partially offset by lower restructuring expense. The income tax rate for this quarter was 30%, compared to 32.1% in the same quarter last year. The lower rate this year was caused by the generation of a lower share of our global profits in jurisdictions with higher tax rates, partially offset by a higher level of unfavorable discrete income tax adjustments. Net income attributable to the company for the quarter was $31.4 million, a reduction of $1 million from $32.4 million last year. The reduction was caused primarily by the lower operating profit, partially offset by the lower tax rate. Earnings per share was $0.97 in this quarter compared to $1 last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, and expenses associated with the SIRCOMP acquisition and integration, adjusted earnings per share was $1.01 this quarter compared to $1.09 last year. Adjusted EBITDA declined by 5.8% to $69.4 million for the most recent quarter compared to the same period last year. Machine clothing adjusted EBITDA was 63 million, essentially flat compared to the prior year quarter and represented 39.4% of net sales. AEC adjusted EBITDA was 19.3 million or 25.9% of net sales down from last year's 22.8 million or 31.4% of net sales. Turning to our debt position, total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt, declined from $384 million at the end of Q1 2021 to $350 million at the end of Q2, and cash increased by just over $15 million during the quarter, resulting in a reduction in net debt of about $50 million. Capital expenditures in the quarter were approximately $11 million compared to $9 million in the same quarter last year. The increase was caused primarily by higher capital expenditures in machine clothing. As we look forward to the balance of 2021, the outlook for the machine clothing segment remains strong. Compared to the same period last year, MC orders were up 10% in the second quarter and up over 3% year-to-date. We are also seeing some foreign currency tailwinds to our MC revenue, primarily driven by the strong Euro, although the recent strength in the dollar versus the Euro means that we are unlikely to see the same foreign currency tailwinds in the back half of the year. Overall, we are raising our previously issued guidance of revenue for the segment to between 585 and 600 million, up from the prior range of 570 to 590 million. From a margin perspective in machine clothing, we delivered another strong quarter with adjusted EBITDA margins of almost 40%. We saw some increase in the level of travel during the quarter, but we are still not back to a normal level of travel, and the segment's travel expense in the quarter was still almost $2 million below the level in the same quarter in 2019. So we may see some additional pressure from that in the balance of the year as we continue the return to normal. We have also seen some pressure from increased input expenses, both war materials and logistics. and expect these pressures to continue through the balance of the year. We continue to work to offset the impact of these cost increases to the greatest extent possible by driving down our production costs through continuous improvement initiatives. However, we do expect to see overall margin pressures in the back half of the year driven by both increasing travel expenses and rising input costs. At the start of the year, we had anticipated seeing foreign currency exchange rate pressures on MC profitability, particularly caused by the recovery in the Mexican peso and Brazilian real, as the devaluation of both of those currencies in the middle of 2020 had provided us a bottom line benefit, since we have more expenses than revenues in those currencies. Year to date, we have not seen as much headwind from those currencies as we had expected, And we have also benefited from the strong Euro, a currency where we have more revenues than expenses. As a result, overall, year to date, foreign exchange rates have actually provided us with a modest adjusted EBITDA benefit compared to the same period last year. However, based on current exchange rates, we will not see the same comparable foreign currency benefit in the back half of the year. We are also cautious about the effects of a potential resurgence in COVID cases on segment results in the back half of the year. As a result of all of these factors and the increase in revenue guidance, we are increasing our adjusted EBITDA guidance for the MC segment to a range of 210 to 220 million, up from the prior range of 195 to 205 million. Turning to engineered composites, we delivered a strong quarter, aided by the net favorable adjustment to long-term contract profitability. Absent that pickup, our Q2 results were consistent with what we had indicated last quarter, down from Q1, representing what we had expected to be the trough for the year. However, given the impact of the net favorable adjustment, on the second quarter results, we now expect that Q2 will be the quarter with the highest segment profitability this year, as we expect Q3 and Q4 profitability to be more in line with what we delivered in Q1. For the full year, we still expect 787 program revenue to be down over 40 million from the roughly 50 million generated on that program last year. with Boeing's recent announcement of a reduction in 787 build rate, all but eliminating the possibility for any upside on that program later in the year. We also still expect leap revenue to be in line with prior expectations and roughly flat to last year. However, on a more positive note, while F-35 revenue was down slightly in the second quarter compared to the same period last year, Recent order volume has given us confidence that we will not see the full year decline in F35 revenue that we had previously expected. Overall, due to the increased confidence in F35 revenue, the adjustments to long-term contract profitability this quarter, and improvements in several other areas, we are raising our guidance for segment revenues to be between 290 and 310 million up from the previous range of $275 to $295 million. From a profitability perspective, driven by the same factors, we are raising our AEC adjusted EBITDA guidance to be between $65 and $75 million, up from the prior range of $55 to $65 million. We are also updating our previously issued guidance ranges for company-level performance, including revenue of between 880 and 910 million, increased from prior guidance of 850 to 890 million. Effective income tax rate of 28 to 30%, unchanged from prior guidance. Depreciation and amortization of approximately 75 million, the top end of prior guidance. Capital expenditures in the range of 40 to 50 million, down from prior guidance of 50 to 60 million, gap earnings per share between $2.84 and $3.14, increased from prior guidance of 238 to 278, adjusted earnings per share between 290 and 320, increased from prior guidance of 240 to 280, and adjusted EBITDA of between $225 and $240 million, increased from prior guidance of $195 to $220 million. Overall, we continue to be very pleased with the performance of both segments. Both face challenges, primarily rising input costs for machine clothing and a recovering commercial aerospace market for the engineered composite segment, But both segments are overcoming the challenges and delivering strong results, which is a testament to the hard work by all of our employees across the globe. With that, I would like to open the call for questions. Tani?

Thank you, ladies and gentlemen. If you wish to ask a question on the phone line, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time. by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 then 0 at this time. Our first question comes from the line of Peter Arment with Baird. Please go ahead.

Hi, good morning. You actually have Eric Rudin on the line for Peter today. I guess if I could start off, Stephen, maybe at MC. I'm just wondering how the mix that you saw for sales in this quarter compares to what you're seeing in the current order environment there, looking to the back half of the year, with geography being the bigger driver of margin pressures there. Is there any shift in a particular region causing any headwinds, or are the headwinds more surrounding just the rising input costs and the other items you called out there?

Morning, Eric. So there is a little bit of pressure from that. Certainly right now, the recent order strength we've seen has been back to strengthen the Asian market, China in particular, which, as we've discussed before, is on the margins of somewhat lower overall margin business. So that's certainly part of the pressure we see in the back half.

Okay. And then in terms of rising input costs, How does what you're kind of looking at for the second half of the year compare to what you've already seen and been managing through in the second quarter?

It's certainly still increasing in the first instance. And secondly, we certainly didn't see even the current level of elevated costs for the full first half of the year. So we're in an environment where we see increased pressures. We also, as we've discussed previously, It takes a while for some of these rising input costs to reflect themselves in our cost of goods sold as we make product and it goes in the inventory and then gets sold. There is typically a lag of about six months from some of those rising costs in raw materials before the impact or actual cost of goods sales. So it's a different environment than you've seen in the first half of the year for sure.

Okay, that's helpful. And maybe just one quick one on AECs. Appreciate the details on moving pieces around the D stock there. But is the 60 to 65 million we kind of talked about as a full year headwind for 2021 on the inventory D stock still the right number? It sounds like 787 is going to be a headwind for longer, but F35 maybe offsets a bit of that. Maybe you could just talk to the moving pieces there.

Yeah, certainly. The number is lower right now because we certainly don't face the F-35 decline, as I indicated. So the destocking number for the year is somewhere in around about 50 million at this stage.

Okay, thanks. I'll hop back into the queue. Thank you, Eric.

Thank you. Our next question comes from the line of Gautam Khanna with Cowan. Please go ahead.

Hey, guys. Good morning.

Morning, Colin.

I had a couple of questions. You know, machine clothing continues to kind of do better than we thought it would when we were looking at a longer term framework. What do you think the right annual EBITDA is, adjusted EBITDA for the machine clothing business? Are we in a new paradigm where we're just going to be at, you know, 200 million plus? Or do you think it will ultimately mean revert down?

Yeah, it's pretty hard. We have that discussion internally quite a bit. It's pretty hard to look out with a crystal ball and say what it's going to be, but it does feel like it's gotten to a better level. And operations have been holding up really well, so we're going to try to keep it at that level.

Okay, got it. Secondly, just on the F-35, so what actually changed? I'm just curious, is that the full $15 million? variance on the D stocking that you get 65 goes to 50? Is that all F 35? And sort of what what changed in the last quarter?

Yeah, maybe just a little color than steaming and add the financials. We did work with our customer Lockheed and we got improved order flow in the quarter that helped with F 35 production rates to keep at a more level load on the factory so that we weren't actually reducing as we had expected when we spoke in the last quarter.

And some of that includes continuation of some of the additional work we had talked about previously, picking up some of the fixed wind skins we're making, the automated fiber replacement machine. We got a contract extension on that, which allowed us to continue work on that which was certainly not a sure thing early in the year. But overall, yeah, the decline from the 60 to 65 range to the 50 range, Gotham, that you referenced, is really driven by F-35. The other programs that we look at out there, most notably 787, there's been no material change from what we expected, you know, six months ago.

Okay. And with the F-35 change, does that – uh effectively prevent or mute the growth we might otherwise see in 2022 and 2023 because when we look at their planned production or said differently their planned deliveries i think it's 139 this year 169 next year and then stabilizes in the 170 range two years out so are we seeing that that pick up this year if you will and so it's going to be flattish in 22 and beyond, just based on your discussions with Lockheed, or how should we think about the growth program?

Yeah, I wouldn't jump to that conclusion just yet. You know, I think we've got to get a little further along here to figure out what 2022 looks like. But yeah, so our production goes to a mix of new aircraft as well as sustainment use. So I don't think it eats into the future aircraft program.

Yeah, Gotham, while we clearly don't have numbers and aren't giving any guidance yet, we would clearly still expect to see some growth in F-35 in 22 and in 23.

Okay, got it. Last one before I turn it over, just on the LEAP program. So you talked about the 1B. Any updates there on sort of when you expect to have inventories in balance with, you know, no excess inventory, if you will? And you also mentioned, I think, all three facilities are ramping up on the LEAP. If you could just explain sort of what you're gearing up to do, you know, this year and next year in terms of production on the program.

Yeah, we are gearing up the production in the facilities, and obviously the A320 NEO program is going fast, and that comes out of sort of the destocking phase. into more alignment with production of new aircraft long before the 737 program does. So we are ramping up all three facilities as we look into next year. It's relatively flat through the rest part of this year, but growth into next year.

Yeah, and Gotham, look, in terms of the inventory level, I mentioned we have 170 roughly engine chipsets on hand. at the end of the quarter, and that's down from close to 250 at the start of the year. So it's been a nice decline, a decline of 70 ships that's year-to-date. We have no intention nor desire to get to zero on that. The exact level we need to get to really depends on the volume, the rate at which Boeing is producing, therefore we're shipping, because we have a contractual requirement of a certain number of weeks of inventory on hand. So it's not exactly clear what, you know, it's kind of a complicated calculation as you're looking at us declining and then potentially going up at what point we cross. But when we get to somewhere, let's say, you know, Certainly wouldn't go below 100 chipsets on hand to give you an idea of how many we have to burn through. So, you know, the most recent quarter we burned through 20. So if you think, you know, we're getting down to 100, we'll take, you know, several quarters. We'll take one or two quarters, but... It's several quarters likely ahead of us, but that all depends on Boeing ramping up production so they're ready to kind of meet us when we get to that point. Obviously, Boeing is doing a great job getting back up to production, but there's still a lot of uncertainty as to what rate they'll hit at what point in time.

Thank you very much, guys. Thank you, Colin.

Thank you. As a reminder, please press 1 and 0 to put yourself in the question queue. Our next question comes from the line of Michael Cermoli with Truist Securities. Please go ahead.

Hey, guys. Good morning. Thanks for taking the call here. Maybe just one on machine clothing. I guess with some of the orders you're seeing, you know, and thinking about the rising input costs, are you able to – potentially pass through some of those costs? Or, you know, I think you alluded to most of the plan of attack was going to be on the productivity side, but maybe just what you're seeing or what the flexibility is there.

Yeah, it's a good question. We are working to see if we can pass through costs. It's a mixed picture because we have some contracts that are longer than others, so price negotiations come up. over a period of time and with different customers at different times. So we are looking at that as we go into next year. So we will work to do that. Our primary approach has been to drive continuous improvement to offset inflation costs. Just in general, we've done that for years.

Got it. Got it. And then just maybe one other one on the engineered side. I mean, when you think about the LEAP program, obviously Airbus has put out some specific color on where they want to take production. I mean, you know, assuming a path to 75 and assuming, you know, the MAX program, I mean, are you guys set on potential capacity and the ability to meet that potential demand? I mean, how are you guys looking at the program potentially re-accelerating and everything from labor to, you know, machining and tooling?

Yeah, I'd love to have that challenge. We've done a good job of working on the facilities while things have been slower here over the last year or so, improving productivity, improving our throughput. So as production ramps back up, we believe we're in much better shape than we were even in 2019. So, yeah, we are hiring people. That will be the thing we're keeping our eyes on is how easy it is to get operators and folks in the facilities. So far, so good. And so yes, we're we think we have the capacity in place. We put a lot of equipment in place back in 2019 to grow. So that'd be a great problem to have.

Got it. And then last one. I mean, you obviously lift the guidance, but the second half, you know, clearly looks to be weaker. you know, kind of across the board, revenue, EPS, EBITDA, you know, anything, I mean, I know you're not going to talk 23, but we've got weakness in the second half, but presumably, you know, as, you know, the world begins to recover, travel recovers, you know, we should see a step up as you maybe exit 21 here.

Yeah, I think on the MC side, our third quarter, typically we look at as a little bit of a softer quarter with the summer summer slowdowns, and if paper companies are getting equipment to do maintenance, downtime maintenance, they would have already ordered that in the first and second quarter of this year. So we look at the third quarter as a little bit slower there. And then I think on the AEC side, we've tried our best, particularly on the commercial side where there's destocking going on, to kind of level low the factory as we go back into the second half of the year and kind of run at a rate that's predictable and well-planned so we can execute well in the plants. And then some of our growth programs, they kick in next year, not so much in the middle or second half of this year.

Yeah, if you look at our margins, if you look first at AEC, and by the way, I believe I misspoke earlier and said EBITDA guides for the segment of 65 to 75, it's actually 65 to 70. But if you look at the back half of the year, if you take out the unusual pickup and long-term contract performance that we had here in the second quarter, the $4 million gap, that was largely attributable to reduction in loss reserves. There's not a huge amount of margin compression in the back half of the year in AEC. The margin compression is really in machine clothing, and it's driven by some of the factors we described, the rising input costs, a significant factor. including logistics, which you can't lose sight of. These are large pieces. It's very expensive to move them. While we try to limit the amount of, you know, transoceanic shipment with pieces of this size and that, you know, we vary going back and forth, for example, between North America and Asia, We do get a fair amount of back and forth between Asia and Europe, and those costs have risen very significantly. That certainly puts pressure. The rise in travel puts pressure on it. The FX environment being less favorable now than the average we've seen year to date puts pressure in the back half of the year. Some of the mix shifts that I believe Eric asked about up front place some pressure. And just overall, there is, to be fair, a little bit of concern also around COVID and not necessarily just how it impacts our markets, but also our factories. At various points in time, we've had to shut down some of our factories because of COVID outbreaks in the region. And so there's a little uncertainty in the back half of the year as well there. Got it. Thanks a lot, guys. Thank you.

Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Please go ahead.

Hey, guys. Could you clarify a little bit, just a little confused on the impact of 787 on the business? Meaning that, you know, there's looks like there's a chance here that Boeing might not deliver any 787s for a while, maybe not till the end of the year. How's that flow through the business for you guys?

I guess as a start, as we've communicated before, we've been running the 787 line just warm enough to keep it going. I mean, it's such a low level of production. We don't want to lose the capability, the talent, the people, and keep operations running and doing that with our channel customers. So it's at a very, very low level. The more recent announcement from Boeing, while a little disappointing, is not really going to affect us this year. It's probably going to push things maybe further to the right as we look at the next year and beyond.

Yeah, so for the year, Ron, we've said, you know, to expect somewhere in the range of, let's say, $10 million of revenue this year. On 787, we delivered four year-to-date, so six in the back half. So whether it's, you know, six or closer, you know, lower than that, it's not going to have a material effect. It is important to understand that is a firm fixed price contract. And so as we lose revenue, you know, the decremental margins are not just, you know, the average margin of that program because it's obviously absorbing overhead. We've got loss of fixed cost absorption. I believe on our fourth quarter earnings call – when I provided guidance six months ago, I talked about the fact that some of the incremental margins on some of our fixed price programs had EBITDA margins in the 30s. And so the drop through is certainly going to be in that sort of level as we lose that EBITDA revenue. So this year, irrespective of what happens, not a huge impact. But certainly next year, we had anticipated that an increase from this year's level. If things, you know, change, we could certainly see a repeat of what we're seeing this year or even lower level, closer to zero revenue next year. But that's obviously an open question.

Got it. And then maybe just one follow-up. If Airbus were to actually get to 70 A320s a month, how are you guys set up to handle that?

Yeah, and look, Bill touched on this a few moments ago in that, you know, we certainly need to staff up with operators in our facilities. We, you know, brought our headcount down as our production volumes decreased. It's obviously a very competitive labor environment right now, and so that's clearly, you know, it's not just flipping a switch. There's challenge in it, but we certainly have the physical plant that we can meet those needs. There may be some capex required, but nothing unachievable. The big challenge is just getting the labor force we would need, not that we have unmet needs today, but staffing up to that level would obviously require some significant hiring, and as I say, it's a competitive market.

Yeah, I think that as we think about the more near term going from 45 to 50, 50 plus, we're ready for that. We have to add people, but we have the capital in our facilities already.

Thank you.

Thank you. And we have no remaining questions in the queue at this time.

Okay. Well, thank you. Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. And, of course, if you have any questions, please feel free to reach out to John Hobbs, our Director of Investor Relations. His number is 630-330-5897. Thank you, and have a good day.

Thank you, ladies and gentlemen. This conference will be available for playback later today at the Albany International website. at www.albint.com. That's www.albint.com. That does conclude our conference for today. We thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.